Entrenchment of regionalism: WTO legality of MFN clauses in preferential trade agreements for goods and services

The most favoured nation (MFN) clauses in preferential trade agreements (PTAs) under GATT Article XXIV or under GATS Article V entrench the preferential trade relations between the PTA parties because the trade liberalization in future PTAs with third parties will be constrained by the existing PTA MFN clauses. Trade liberalization based on PTA MFN clauses cannot be considered part of the internal trade liberalization required by GATT Article XXIV:8 or GATS Article V:1. The exclusionary effects caused by trade liberalization through PTA MFN clauses increase the burden on trade with third parties. As a result, PTA MFN clauses do not meet the necessity test under the Appellate Body's decision in Turkey-Textiles, as reasonable alternatives to the PTA MFN clauses are available. For these reasons, PTA MFN clauses fail the requirements for legal defences under GATT Article XXIV or GATS Article V for their violations of the general MFN clauses under GATT Article I and GATS Article II. For those products or services subject to existing PTA MFN clauses, any preferential liberalization based on PTA MFN clauses should be accorded non-discriminatorily to all WTO members in accordance with GATT Article I or GATS Article II.